| In 1984, China has established the reserve system, and its initial purpose is to concentrate funds. With economic development, as a means of regulating money supply, the legal deposit reserve ratio has become one of three monetary policy tools to the central bank.We know that many Western countries have the legal deposit reserve system, but not use it as a tool of monetary policy. And even the United Kingdom and other countries with inflation targeting, almost abandoned the legal reserve system. But in China, because the interest rates are non-market and the intermediate target of monetary policy is money supply, as a monetary policy tool of quantity type, the legal deposit reserve ratio is an effective tool to adjust the money supply. For one hand, through money multiplier the legal deposit reserve could double the expansion or contraction in the currency, and then affect the amount of the money supply indirectly. On the other hand, because of the long-term trade surplus, Funds outstanding for foreign exchange remains high. In order to guarantee the stability of RMB exchange rate, the central bank had to put a large number of money as base currency into the market. And the initiative of the open market operation and rediscount policy is not enough on the contraction of market liquidity. Because the legal deposit reserve ratio is legally enforceable, it can affect the liquidity of the banking system, but do not shock the market and financial institutions. So the legal deposit reserve system is an important role in long-term China's monetary policy.From first time using, China has adjusted it for 42 times, and the frequent mobilization started from the second half of 2006. Because of the inflation, credit expansion, and excess liquidity, the legal deposit reserve ratio raised for 22 times between 2006 and 2008, from 7.5% up to 17.5%. In the second half of 2008, to suppress the effect of finance crisis and disasters and stabilize the economy, our country put a lot of money into the market, and lowers the legal deposit reserve ratio. Since 2010, with the high inflation, the case of excess liquidity, China raised the legal deposit reserve ratio for 12 times, from 15.5% up to 21.5%. The frequency is very high, ever once for a month in the first half of 2011. From raising the reserve ratio in 2010, M2 growth rate and M1 growth rate over the previous year decreased by 4.6 and 8.5 percentage points at the end of May 2011. In June, money supply growth has rebounded, M2 growth and M1 growth rate last month rose 0.8 and 0.4 percentage points, and the regulation of money supply is still pressure.That the central bank adjusts the legal deposit reserve ratio can affect the money multiplier, and thus control the money supply, bank credit, then affect on the real economy sector, achieving the established objectives of monetary policy finally. Whether frequent adjustment on the legal deposit reserve is effective, it is valid on the control of money supply, there will be discussed in this passage. First this paper describes the development of legal deposit reserve at home and abroad, and then elaborated on China's reserve system and its mechanism. It analyzes China's reserve policy's implementation and the reasons for frequent mobilization of the reserve policy. According to the mechanism of the legal deposit reserve affecting on the money supply, it observes the real effect of the reserve policy. In this paper, we use a least squares regression model to analyze the effect between the legal deposit reserve and money supply. Then it comes to the conclusion that the effect of the legal deposit reserve policy is not very obvious. Given this result, we further analyze the factors that affect the policy, such as mechanism of the legal deposit reserve, base currency, reserve system, interest rate, and exchange rate and so on. On this basis, it put forward some suggestions and strategies to improve the effectiveness of the legal deposit reserve policy. |
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